REFINERIES: Dangote to the rescue?

Nigerians may have heaved a huge sigh of relief with the media reports that Alhaji Aliko Dangote, Africa’s richest billionaire, has also waded into the murky waters of petrol refinery business in Nigeria.

The multiplicity of multi-billion dollar cement factories in several African countries are clear demonstrations that Dangote’s business savvy extends beyond Nigeria’s borders. Indeed, Dangote stocks probably make up more than 50% of total equity values of over N12bn on the Nigerian Stock Exchange, on which Aliko Dangote currently sits as President. In other words, with assets valued at over $20bn, Aliko Dangote regally commands intimidating business credentials, which demand that his business choices and strategies must be respected.

Nonetheless, recent media reports that Dangote would sink about $8bn into building a mega refinery in Nigeria may be seen by some observers as sprinting into a territory, where angels fear to tread!

On the last count, there were over 23 beneficiaries of licences to establish refineries in various locations in Nigeria; 20 of these licences went to private investors, while the federal government and Chinese investors, later in 2011, jointly undertook to also build refineries in Kogi, Lagos and Bayelsa States respectively.

In an earlier article in July 2012 in this column titled “Six New Refineries Hurray, But Not Yet Uhuru” (www.lesleba.com), we noted with concern that “surprisingly, no licencee has so far shown much seriousness; initially, licencees decried government’s requirement of a huge upfront startup fee; ultimately, the authorities reconsidered and accordingly reduced the fee. Nonetheless, the investors still failed to begin construction. Local funding was obviously a problem, as prevailing cost of funds above 20% makes borrowing for such a project a suicidal mission.

“Alternatively, much cheaper foreign loans require sovereign guarantees that government was not willing to consider. More importantly, all investors preferred a free market pricing policy that eliminated subsidies, as the uncertainty and time lag related with subsidy refunds could ultimately jeopardise the success for such ventures”.

In the light of the foregoing,some Nigerians decry the reluctance of government to directly commit fresh funds to build additional refineries, as insensitive and irresponsible. Curiously, the same Nigerians also recognize that public establishments and parastatals do not show the required discipline to run public utilities and corporations efficiently; besides, such establishments provide substantial opportunities for waste and corruption.

Nonetheless, the supporters/promoters of government refineries insist that what is good for the goose is also good for the gander, and consequently, argue that, if in spite of the advanced plans for privatization, government still currently seeks over $4bn to revamp power infrastructure, then the establishment of new refineries should similarly enjoy the same largesse!

However, in early July 2012, there were media reports of a fresh memorandum of understanding between a partnership of private United States/Nigerian companies and the federal government. Under this MOU, six refineries would be constructed in modular forms within 30 months at a cost of $4.5bn. According to Mr. Mansfield, the consortium’s spokesperson, the modular construction process for the refineries “entails six months of construction works in the US, (including all piping and electrical work), one month for test-running and dismantling the refinery, another month for transportation to Nigeria, and four months to reassemble the plant, and commence production”.

Incidentally, it is almost a year since the federal government MOU with the American consortium, but regrettably, there is not yet one new refinery in sight!

Indeed, we had cautioned in our above referenced article that “in its anxiety to facilitate adequate fuel supply, the Nigerian government appeared constrained to fetch water with a porous and poorly cellotaped basket! The ultimate result can only be frustration and failure”.

Consequently, we advised that a successful strategy for private refineries must inevitably abolish Central Bank’s illegal substitution of naira for monthly distributable dollar denominated revenue and replace this economically destabilizing payment system with monthly allocations of dollar denominated revenue with the instruments of dollar certificates.

Undoubtedly, such payment system would also be a more plausible watertight vessel for the resolution of the subsidy dilemma, as the resultant strengthening in the exchange rate of the naira will precipitate a huge fall below N97/litre in the price of fuel, thereby making subsidy payments unnecessary. Furthermore, a level playing field that would motivate and spur investors to quickly establish refineries would similarly evolve.

So, in spite of the serial failures of earlier licencees, why, we may ask, should Dangote’s current foray elicit any hope of success with the continued entrenchment of the fuel subsidy system? Well, even a casual observer of Aliko Dangote would recognize that the eminent gentleman plays hard ball, and is obviously not one to carelessly throw away money, especially when such funds are personally guaranteed debts. Incidentally, last week, Reginald Stanley, the Executive Secretary of the Petroleum Pricing Regulatory Agency (PPRA), confirmed in media reports that “in spite of N971.138bn ($6.15bn) earmarked in budget 2013 for subsidy, in reality, no marketer has so far been paid for petrol imports carried out between January and May 2013)”. Consequently, liquidation of 2012 claims may have gulped all payments made so far this year!

Incidentally, none of Dangote’s multifarious investments carry this uncertain payment yoke. Nonetheless, it is unlikely that an astute and successful businessman like Dangote will gleefully borrow $8bn (over N1.3tn) to plough into any business that would be hamstrung by government’s commercially irresponsible and suicidal payment system? Or does Aliko know something that the rest of us are not privy to? Thus, in spite of the fuel uprising of January 2012, is the government ultimately ready to abolish fuel subsidy, without minding whose ox is gored? Only time will tell!